Published on 6 January 2006
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The OECD assessment and recommendations on the main economic challenges faced by Switzerland are available by clicking on each chapter heading below. Chapter 1 identifies the challenges for which the subsequent chapters provide in-depth analysis and policy recommendations.
Chapter 1. Key policy challenges
Switzerland suffers from low growth in production and per capita income and has to confront medium to long term fiscal management issues. This situation is only partly related to poor cyclical developments in Europe as trend growth has also been slowing. Moreover, in the absence of a significant pick up in efficiency, trend output growth will diminish further due to population ageing, inducing growing fiscal pressures. In this context, the authorities face two key policy challenges: i) Raising growth performance. The most immediate challenge is to foster the recovery, following the recent weakening of activity. In the longer run, raising potential growth will require improving labour utilisation and, more importantly, boosting productivity. Increasing competition is essential, while maintaining a strong innovation performance, which has weakened somewhat, is also important. ii) Controlling public spending better. The inadequate control of public spending since the early 1990s has triggered a sharp rise in taxation and rising public debt. Problems to be tackled include deficiencies in the fiscal framework, insufficient control of social spending and a lack of efficiency in some other government programmes.
Chapter 2. Improving the fiscal framework
Since the early 1990s, Switzerland has been confronted with a growing fiscal management problem which stems only in part from sluggish growth: it is primarily rooted in insufficient control over public expenditure which has triggered a sharp rise in taxation, as well as a rise in deficits and debt. The causes for the expansion of the public sector, which has been very pronounced, are many. They include the high income elasticity of demand for numerous public programmes, such as health care or education (“Wagner’s law”), whereas there are scant productivity gains in the production of those services (“Baumol’s law”). But the same factors are at work in other economies and thus cannot explain why upward pressures are stronger in Switzerland. Likewise, it is difficult to attribute sharply rising spending to population ageing, as the proportion of pensioners in the population has hardly changed. The fact that spending has increased across the board highlights that there are problems with the fiscal policy framework. Recent initiatives to improve it have run up against difficulties as evidenced for instance by the implementation problems faced by the new debt containment rule. This chapter assesses these recent reforms and proposes avenues for improving this framework to ensure a satisfactory control over spending in a long-term perspective.
Chapter 3. Reforming welfare programmes and raising the efficiency of government interventions
The adoption of a better fiscal policy framework should be complemented by reforms to moderate the strong growth of public expenditure. While the increase in spending by all government levels has outpaced GDP growth, the sharpest rises occurred in the social and medical domain. Deep structural reforms to the disability, health and pension insurance schemes are needed, as recognised by the authorities. However, the difficulties in implementing these reforms raise fears that the scope of changes currently proposed is insufficient. Also, further efforts are required to raise the efficiency with which money is spent and collected by the government. This chapter assesses the reforms of welfare programmes and the modernisation of the administration and the tax system and makes suggestions to enhance their coherence and effectiveness.
Chapter 4. Competition matters for growth
The inadequate functioning of some product markets and lack of competition has undermined the dynamism of the economy, in particular productivity growth. International comparisons confirm that Switzerland suffers from stringent product market regulation, particularly in the sheltered sectors of the economy; this pushes up prices, which are, on average, among the highest in the world. The authorities are fully aware of the situation and competition policy has moved up the policy agenda. A new cartel law has recently entered into force and the government launched a growth package to be implemented during the current legislature, which aims at removing obstacles to competition in the domestic market, liberalising network industries and opening up to foreign competition. This chapter reviews the government’s agenda and progress made in the various areas to identify domains where more needs to be done.
Chapter 5. Innovation: areas for improvement
Given high labour costs, Switzerland needs to maintain a top position in innovation to preserve its competitiveness and a high living standard. Despite some weakening in the 1990s, partly due to sluggish trend growth, the Swiss innovation performance has been very strong. There are, however, areas in which reforms could strengthen innovation. Slow labour productivity growth and mixed results in entrepreneurship surveys suggest that the innovativeness of some parts of the economy could be improved, especially regarding small enterprises in sheltered services sectors. Raising innovativeness, including through fostering the growth of firms, would also reduce Switzerland’s reliance on multinationals which are increasingly mobile. On the other hand, the growing knowledge economy and the increasing competition from emerging countries in skill-intensive activities suggest strengthening the Swiss education system which is currently focused on vocational education. This chapter provides an overall assessment of innovation and framework policies to identify areas for improvement.
Chapter 6. Labour supply can be raised further
This chapter examines how labour supply can be raised in order to sustain higher potential growth. Structural problems in the labour market remain limited. The agreement on the free movement of persons with the European Union, that was recently extended to the new EU member countries, has had little impact on the labour market so far. However, while employment ratios are high, considerable scope exists to increase the volume of female labour supply by removing obstacles to their full-time participation in the labour market. This could also contribute to offset the negative impact population ageing is expected to exert on the labour force in the coming decades.
A printer-friendly Policy Brief (pdf format) can also be downloaded. It contains the OECD assessment and recommendations, but not all of the charts included on the above pages.
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For further information please contact the Switzerland Desk at the OECD Economics Department at email@example.com. The OECD Secretariat's report was prepared by Claude Giorno and Florence Jaumotte under the supervision of Peter Jarrett.